Provisional tax is a way of paying your income tax evenly throughout the financial year. You make provisional instalments of income tax during the year, the provisional tax you have paid is then deducted from your final tax bill.
You will be subject to the provisional tax rules if your prior year Residual Income Tax (RIT) is greater than $2,500. Your RIT is your overall tax liability after subtracting any tax credits (excluding provisional tax already paid), and it is clearly labelled in your most recent tax return.
The two most common ways of working out your provisional tax is the standard option and the estimation option.
If you are also registered for GST, and meet the eligibility criteria, the GST Ratio option may be available to you as well (see below for more on the GST Ratio option).
Inland Revenue automatically calculates provisional tax using the standard option unless you choose the estimation or GST ratio options.
The standard option is based on an assumption that your income will be similar to prior years.
The standard option takes your most recent RIT and makes an adjustment to work out the provisional tax payable.
To calculate provisional tax for the 2017 income tax year we'll use 2015 RIT plus10% or 2016 RIT plus 5% whichever is the most recent income year filed.
The other way to work out your provisional tax is to estimate what you think your residual income tax will be. When working out the tax, keep the following points in mind:
- To get the right tax rate -
- Add up all your estimated income
- Work out the tax on the total
- Subtract any tax credits (like PAYE)
- Using the estimation option, if your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the underpaid amount
- You can estimate your provisional tax as many times as necessary up until your last instalment date. Each estimate must be fair and reasonable
- We often use this for companies becasue the Inland Revnue charge use of money interest at a lower threshold than for individuals.
The due date and amount of instalments you need to make for payment of your provisional tax each year depends on your balance date, which of the above options you use and how often you pay GST (if registered).
If you file monthly or two-monthly GST returns and you haven’t selected the ratio payment option, you’re required to make three provisional tax payments each year. If you file six- monthly GST returns you're required to make two provisional tax payments.
For example; If you have the following one of the following balance dates, and are 2 monthly GST registered, provisional tax payments are due:
If you have a 31 March balance date, provisional tax payments are due on:
|First instalment||28 August|
|Second instalment||15 January|
|Third instalment||7 May|
If you have a 31 May balance date, provisional tax payments are due on:
|First instalment||28 October|
|Second instalment||28 February|
|Third instalment||28 June|
In some circumstances you may be charged use of money interest if the provisional tax you paid is less than your residual income tax. If the provisional tax you pay is more than your residual income tax, Inland Revenue may pay you interest on the difference.
Another option – the GST Ratio option
If you are registered for GST, you may be able to pay your provisional tax at the same time as your GST payments. This will be of benefit to the cashflow of those who have fluctuating Income and turnover throughout the year. You will be able to use the GST ratio option if:
- You’ve been in business and filing GST Returns for all of the previous income tax year
- Your residual income tax for the previous year is greater than $2,500 but less than $150,000
- You file your GST returns every month or every two months
- The business you’re operating is not a partnership
- Your ratio percentage that Inland Revenue calculates for you is between 0% and 100%
This method of paying provisional tax may not suit everyone and we suggest that you discuss this with us before deciding on this option.
For further information on provisional tax give us a call or refer to the Inland Revenue Website.
Return to Tax Facts